A new year is about to dawn, and it gives us an opportunity to take stock of what we have achieved in the year gone by, and also plan for all the things we hope to accomplish in the future. Broadly, all our endeavours can be condensed to three things: Getting wiser, healthier, and wealthier. Here are ways to get wiser about your wealth.
Invest and insure separately
Many people ignore tax and investment planning till the final weeks of the financial year. Then, they settle both problems by simply buying insurance. This may help save tax, but there are much better ways to invest. The typical endowment insurance plan offers conservative returns and is not the best way to build long-term wealth. Nor is its death benefit going to be ample for the long-term financial interests of your dependents. So, separate your insurance and investment needs.
Invest every month
Investing need not be equal to buying insurance. The best instruments for building long-term wealth building are mutual funds, equity, real estate, gold, and small savings schemes such as PPF, Sukanya Samriddhi Scheme. No matter what the investing goal is, no matter how small your budget is, make it a point to invest every month. Even if it’s a few thousand rupees a month, you must start doing so early in life. For example, you can invest Rs 4,500 in a mutual fund Systematic Investment Plan growing 10 per cent annually for 30 years, and build a corpus of Rs 1.02 crore. But, if you are only five years late starting for the same target, your monthly contribution would need to be Rs 7,500 – or Rs 13,500 if you are 10 years late. Such is the power of compounded growth.
Buy term plan; also insure dependents
If you have dependent family members, you must consider having a life-term insurance cover that is worth 10-20 times your current annual income. Anything less – such as an endowment plan – could jeopardise the financial safety of your dependents. Term plans are cheap and come with a host of add-ons such as month income and premium return. Additionally, you should get a health cover for all your family members. Doing this would save you the lakhs of rupees you will have to spend out of pocket in case of a medical emergency.
Plan your taxes
Don’t make panic investments at the end of the year — especially when a large TDS happens in March. You have the whole year to figure out what you’ll be earning and paying in tax. Use this time judiciously to explore all your tax-saving investment options. Under Section 80 (C), public provident fund and equity-linked saving scheme potentially offer better long-term returns than insurance plans. Buying health insurance for yourself and dependent parents helps you save further tax. Your amounts pertaining to home loan principal and interest repayments or rent paid should be clear. If you’re falling short of exemption limits, you should identify and invest in a tax-saving instrument at the earliest. Ensure tax efficiency on your FDs by limiting your interest earnings to the Rs 10,000. Beyond a limit, you should switch to debt mutual funds which offer higher returns as well as tax efficiency.
It’s time to let go of cash and switch to digital payments. The demonetisation has come as further motivation to go digital. You can start leveraging the power of payment automation: set up your credit card, e-wallet, or netbanking to pay bills automatically, helping you earn reward points and cashbacks. Also issue ECS instructions for insurance premiums and EMIs. Start using your debit card for transactions. Give e-commerce a chance and use the many websites and apps available for daily needs like groceries and medicines. Give paperless financial products a chance since they are the future. Not just this, encourage people around you to open bank accounts and digital wallets so they too could enjoy digital conveniences.